The Impact of Raw Materials Price Volatility on Cost of Goods Sold (COGS) for Product Manufacturing

Abstract

The supply chain ecosystem has become increasingly volatile due to a host of different factors. In an unpredictable environment, the factors influencing decision-making fluctuate constantly over time, and the effect of volatility on supply chain parameters such as cost, revenue, and working capital must be evaluated periodically. This paper seeks to develop a set of mathematical programming models for exploring the impact of price fluctuation of raw materials on the cost of goods sold (COGS) of end products relative to targets in manufacturing companies. The mathematical programming problems proposed in this paper rationally minimize the COGS of end products while satisfying a set of constraints regarding forecasting and physical conditions. The optimal solutions of the proposed models provide guidelines on the optimal price at which to purchase all raw materials, leading to the minimum the overall COGS value for the enterprise. We also introduce a special type of sensitivity analysis, in which we explore the conditions where the optimal purchasing price of a raw material used to manufacture an end product changes within its feasibility range, and the relative effect on how much the minimum COGS of end products fluctuates. Finally, an empirical example presented in this paper illustrates the practicality and usefulness of the proposed approach in practice.